Saving to survive

Access to small loans and safe places to save can make a big difference in the lives of poor people. The Rockwool Foundation and DanChurchAid are co-operating in setting up village banks in Malawi to ensure that rural populations have access to financial services.

Joyce Msuku is 36 and lives in the village of Bunganiro in northern Malawi, which is where the village banks are currently being set up. She is a single mother of five who takes care of her aged parents. Like many others in the area, Joyce relies on Lake Malawi to provide for her small family. She dries and sells small fish, which she buys from the local fishermen. But Lake Malawi is not always calm enough for the fishermen to go out in their small canoes, which means that Joyce’s income is highly uncertain, and often she must borrow from friends and relatives just to get by. Before the project, Joyce complained that “I have no means of saving. It is too risky to save money in my own hut, and the bank is too far away and takes a large fee for opening a savings account.” Since she joined the project, things have changed for the better for Joyce. She can now save with the newly-established village bank. “I could not develop my fish business in the past as I would often consume all the capital, but now that I save and borrow with my group I am consistently making profits and running my business successfully,” she says.

  
Joyce Msuku is a member of one of the village banks established in northern Malawi (photo Jonas Helth Lønborg).

Banks primarily in urban areas

Saving and borrowing money is difficult in rural Malawi. Microfinance institutions are mostly found in urban areas. Distances between clients in rural areas are often large, making loan disbursement and monitoring too expensive. As an alternative to formal microfinance institutions village banks, known as village savings and loan groups (VSL groups), are sustainable and low-cost options. A VSL group is a self-selected group of people who pool their own surplus money in a fund from which members can borrow. The borrowed money is repaid with interest, causing the fund to grow. The regular savings contributions to the group are deposited with an end date in mind for distribution of all or part of the total funds (including interest earnings) to the individual members. VSL groups are set up through a series of training sessions where villagers learn how to make decisions, collect savings and dispense loans among themselves. The group is provided with a cash box with three padlocks, which ensures that no single person can access the cash. Transactions can only be carried out when all of the group members are present. All the funds in the VSL group come from the members themselves, and access to a safe and reliable savings facility is just as important as the opportunity to take out loans. The project started in the fall of 2009 and the first village banks will become fully functional in the spring of 2010.

Each group has a cash box with three padlocks, ensuring that no single person can access the cash. Transactions can only be carried out when all of the group members are present (photo Ole Dahl Rasmussen).

Both microcredit and microsavings are important

Microcredit has received enormous attention, especially since Muhammed Yunus was awarded the Nobel Peace prize for his pioneering work in setting up the Grameen Bank, one of the world’s largest microfinance institutions. In recent years, however, it has become clear that microsavings are equally important, and in great demand. Two reasons for this are the highly variable incomes of the poor and the absence of safe places to store their money. Unforeseen shocks such as drought or illness are often reasons for saving. Many households in the northern part of Malawi keep livestock as security against any shocks they might suffer. But by selling their productive assets when a shock occurs, they also sell off future income. And shocks occur often; drought, floods and illness are common. The sudden death of a household member or close relative is another blow that can strike at any time. All these are risks that the average Malawian family must live with in their everyday lives. Sustainable and reliable access to savings provides the family with an effective cushion against shocks and allows them to keep their productive assets even in times of crisis, when in fact they need them most.

Rice cultivation and fish businesses are important income-generating activities in villages like Bunganiro in northern Malawi, but neither provides a stable source of income throughout the year (photos Jonas Helth Lønborg).

The method

Village banks channel funds within the village from people who want to save to people who have ideas for profitable projects, but lack the funds to realise them. The approach makes use of the resources already present in the village, thereby making the bank sustainable. Villagers are willing to save because of the security and because of the interest on their savings paid by the village bank. The rate of interest on loans is set by the group, and all income is paid out to the members. In this project, there are no physical inputs necessary such as distribution of tools, building of roads or provision of medical treatment, and this contributes to making the scheme sustainable. The most significant project input is the training sessions given to the group by a field officer during the first year. Groups meet every week, and the field officer participates in all meetings during the first nine months. The training consists of nine modules covering management, record keeping, saving, lending and other issues. The groups are encouraged to establish a social fund which provides small but important grants to members in trouble. Not unlike the Danish co-operative movement, VSL groups allow people to administer their own resources in a more efficient manner.

Accountability and transparency

Accountability and transparency are crucial for the functioning of the VSL group, and a number of procedures are designed to ensure these. Groups are led by a management committee, which is elected by secret ballot through a transparent election process. Records are kept in members’ passbooks using stamps that even illiterate people can easily count, and all outstanding balances on loans are memorized by the members sitting next to the borrower at meetings.

Information about individual share and loan amounts is kept in written passbooks that are held by the members (photo Ole Dahl Rasmussen).

Combined practical intervention and research

Projects funded by the Rockwool Foundation commonly include elements of both innovation and the testing of new approaches and methods. Through the projects we wish to develop and document best practices for use in future projects. Apart for the practical goal of providing microfinance to a target figure of 3,000 rural families, the present project also includes a considerable research component. The aim is to deepen our understanding of how poor and vulnerable households are able to make ends meet when income is irregular, what prevents these households from engaging in new and profitable income generating activities, and how important an individual’s specific personality traits are in determining whether he or she decides to embrace new technologies or programmes such as the VSL groups. The research component also deals with the challenge of estimating the real impact of the project – the level of poverty reduction among the target group. This is in fact a very tricky task, simply because it is difficult to select a benchmark group for comparison. Comparing people in the programme with people who are not in the programme can be problematic. Perhaps the most energetic and eager people in the village are the ones who decide to join the project. But such people might have been more successful than others after 3 years anyway – simply because of their energetic natures, and not because of the project per se. Or perhaps the poorer and less energetic people are the ones who join the programme. Even though they get richer than they would have done without the project, they may still be poorer in the end compared to the average level in the village. In such a case it could look as though the project was bad for the poor. In the present project the benchmarks are set up in a way that allows for comparison of participating with non-participating people. The selected benchmarks are the people who have already volunteered to join the project, but who will not receive training and be able to participate until the 3rd year. Researchers from the Rockwool Foundation, the University of Oxford and the University of Southern Denmark are involved in the research component which will help to further refine and fine-tune implementation strategies and hence optimize current and future project.